Revisiting Bilateral Foreign Direct Investment Inflows into BRIC Economies
| Published date | 01 November 2016 |
| Author | Ramkishen S. Rajan,Sasidaran Gopalan |
| DOI | http://doi.org/10.1111/1758-5899.12332 |
| Date | 01 November 2016 |
Revisiting Bilateral Foreign Direct Investment
Inflows into BRIC Economies
Sasidaran Gopalan
National University of Singapore
Ramkishen S. Rajan
National University of Singapore, and
George Mason University
Abstract
Tracking the origins of bilateral foreign direct investment (FDI) flows is required to understand de facto real linkages between
countries, which remains an important area of research and policy concern. However, existing bilateral FDI data may fail to
correctly identify the original sources of FDI flows because they are based on flow of funds rather than ultimate ownership.As
a consequence, several offshore financing centers (OFCs) and tax havens emerge as top sources of FDI flows which provide a
misleading picture of bilateral real linkages between countries. In this context, this paper proposes an alternative framework
to overcome this problem by examining data on mergers and acquisitions (M&As), which offers a far more informative geo-
graphical breakdown of sources of FDI inflows. The paper reconciles bilateral FDI inflows data with M&A data for the BRIC
economies covering Brazil, Russia, India and China, for the period 2001–12. Further, in light of the increasing M&A flows to
BRICs, of equal policy importance is the issue of what kind of FDI should the BRICs attract. In this regard, the paper also sheds
some light on the macroeconomic policy implications of the different kinds of FDI flows to the BRIC economies.
Policy Implications
•The BRIC economies need to support the recent OECD’s initiative to identify FDI by ‘ultimate investment country’thus
overcoming the problem of transhipping.
•Policy makers should deploy a mixture of policy incentives and regulations to strengthen measures to discourage round-
tripping or trans-shipping through OFCs and tax havens.
•Developing economies like the BRICs need better data on Greenfield and M&As, as their macroeconomic implications can
be quite different.
•While FDI inflows in many sectors should be guided by a laissez-faire approach, the BRIC economies should in general
strategically align specific FDI policies with their national development objectives.
•In sensitive areas like health care or pharmaceuticals, while Greenfield investments should be encouraged, policy makers
should ensure that cross-border M&As are consistent with domestic development objectives.
Global foreign direct investment (FDI) inflows reached the
pre-dotcom and global financial crisis (GFC) peaks (2000 and
2006) in 2013 but still have not recovered to the 2007 levels
(Figure 1).
1
Interestingly, as evident from Figure 1, since the
GFC, FDI inflows to developing economies have reached
new highs, but those to the developed economies have
stagnated. While developed economies received about 70
per cent of global FDI inflows on average till 2000, their
shares have dipped since then to about 55 per cent as of
2013. In contrast, the share of FDI inflows to developing and
transition economies tripled from about 20 per cent in 2000
to over 60 per cent in 2013 (Figure 2).
Changing patterns of investment flows are evident from
the rankings of the largest recipients of FDI. In 2012–13,
nine of the 20 largest recipients of FDI flows were develop-
ing countries, with the BRIC economies (Brazil, Russia, India
and China) figuring prominently in the list. Over the last
decade or so, the world has witnessed a surge in FDI flows
to and from the BRIC economies. FDI inflows to BRICs more
than tripled to almost US$300 billion in 2012 (Figure 3).
Their share in world FDI flows reached 20 per cent in 2013,
up from about 6 per cent in 2000. It is notable that, as a
share of the BRICs, China constitutes about 40 per cent,
India makes up about 10 per cent, and Brazil and Russia
each making up about 25 per cent on average. While
China dominates, its share has fallen from about 70 per
cent to 40 per cent, reflecting the emergence of other
emerging market economies. Russia’s share tripled during
the period of 1992 and 2012, while India’s share increased
almost five-fold.
©2016 University of Durham and John Wiley & Sons, Ltd. Global Policy (2016) 7:4 doi: 10.1111/1758-5899.12332
Global Policy Volume 7 . Issue 4 . November 2016
510
Research Article
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